MELTDOWN: Chapter VI

Continuing the fictional metals trading tale by Geoffrey Sambrook. The concluding chapter will follow tomorrow.

VI

It was actually more like five thirty by the time Gerber was able to make himself time to concentrate on the Metal-Exx deal. His analyst had put together a punchy assessment of the company’s current position focusing on the strong track record and contrasting the optimistic forward profit projections with the current short-term problem. Reading through it, Gerber was impressed; it largely confirmed his own view that the projected deal was a good one. He picked up the phone and dialled a number in New York.

The private telephone on Jason Serck’s desk rang, and he picked it up.

“Serck.”

“Jason, good afternoon; or rather, good morning to you. Here is Urs Gerber from the BBV in Basel.”

“Urs, my friend, how are you. It’s a while since we’ve spoken. Is all good with you? And how’s that delightful wife of yours?”

“Yeah, we’re both well, and things here are pretty good. We’re just watching the market carnage and the Chinese rout, but so far we’re managing to keep our heads above water. We cut a lot of our Asian exposure a while ago; I just began to get twitchy and I wanted to get our focus back to markets we really know. Still, we had a good run in Asia. How about you? Still making those super-gains for your investors?”

Serck gave a hollow laugh. “Not really. Our performance hasn’t been great recently. I wish you’d told me to get out of Asia as well. We’re taking a bit of a kicking. But, you know, we’re still here, we’ve ridden bad times before. We’ve just got to draw in our horns and wait for the next opportunities.”

“Well, that’s why I’ve rung, really. I’ve got an opportunity that I think you may like.”

Serck was interested. He knew Gerber well, and had a lot of respect for the banker’s nose for a good deal. They had worked together in the past a number of times, and they’d made some good money together.

“Right now, Urs, I’d listen to the devil, if he showed me a deal. As it is, old friend, I’ll just have to make do with you. What have you in mind?”

“Well, it’s to do with our old friends Metal-Exx. You know we are pretty close to them and we have put together a number of financings for them over the years, as well as the trade finance stuff? Well, there’s an opportunity that came out of a conversation I had with Jakob Steiner – you know Jakob, I assume – about a funding deal they are looking at right now which I think you and I could get together on.”

Serck’s interest was piqued. That was the second time in two days somebody had brought Metal-Exx to the table. “Sure, I know Jakob Steiner – not too well, but we’ve met various times over the years. We’re a major resource fund and they are one of the world’s biggest metal trading companies, so we get to meet from time to time.” He paused for a moment. How much of what he knew should he make apparent? Best be cagey, to begin with. “Current market conditions can’t be too good for them, though. After all, metal prices have taken a hammering and they’ve been up to their eyeballs in the China story for the last five plus years. So what can we do with them?”

“Mmm. It’s true that they have not been well affected by the China problems, but out of problems always come opportunities, and this is one. I’ll give you the bottom line right out, and then we can talk about my proposal to make something out of this problem.”

“OK. You’ve got me listening.”

Gerber rattled off his pitch. Good, historically strong and financially prudent company, healthy forward profit projections, major player in its sector. He ran through his analysts’ forecasts of maintained margins and consolidation of the biggest position in the industry. Serck listened to it all, knowing that at some point there had to come a “but”, otherwise, what was the reason for the call in the first place? Sure enough, it came.

“At the moment, though, the company is suffering from a degree of cash flow squeeze, and is looking to raise some short-term capital to get over the hump.”

“So what are you offering me? A rights issue?”

“No. I have discussed that with Steiner, but honestly I don’t think in the current disturbed market conditions we would get sufficient take-up of the rights. Which would mean that we – or any other lead bank, if they chose someone else – would end up holding more Metal-Exx equity than we would choose.”

“But, Urs, you just gave me your spiel about what a good prospect Metal-Exx is. Why wouldn’t you want to hold the equity?”

Serck was playing with him, and Gerber knew it. “Come on, Jason, you know our business is not that kind of investment. Sure, we take equity positions, but they’re generally short-term trading deals. I’m not a fund manager. That’s your business.”

Serck chuckled as Gerber continued. “Anyway, the need is for a short-term solution, not an infusion of more equity capital. My proposal is a tranche of commercial paper.”

Gerber carried on, outlining the details of the deal he had in mind, as Serck listened intently. DeWet Steyn had not convinced him that his plan had legs, but Gerber was rapidly causing him to change his mind. The banker was effectively confirming that the difficulties in which Steyn had suggested Metal-Exx found itself were genuine and serious. It was a big, successful and – largely – well-run company that was on the verge of unravelling. Or, as Gerber was outlining, it could be saved.

Serck let the other man run through his whole proposal. Then, “It’s an interesting proposition, Urs. I’m sure you realise I can’t make a snap decision on something like this. I’m going to have to ask for a little time to think about it. Suppose we say I’ll get back to you definitively, one way or the other, by mid-day your time the day after tomorrow. That gives me time to do a little research of my own and to look at the cash implications. How does that sound?”

“OK, I can live with that. No longer, though. Any more time than that and it may be too late.”

They finished the conversation, and Serck sat back in his chair and stared through the window, down onto the bustle of Fifth Avenue below. Which way to play it? On the one hand, he could be the saviour, if he went with Gerber’s short-term refinancing. On the other, by allying himself with Steyn, he could destroy the whole thing. Serck was a hard man; after all, locked away in his memory, however much his mind tried to ignore it, was the knowledge that he had been responsible for the death of Mack McKee, after the man had tried to double-cross him during the Kanagi copper scam (see Tarnished Copper, by Geoffrey Sambrook). The prospect of killing a company didn’t bother him, even for a moment, if it meant he could turn a decent profit. No, for him the question was not an ethical one, but rather, which of the two roads would produce the bigger outcome for Leopard-Star? He sat staring out of the window, lost in thought.

The ringing of the telephone jerked him out of his reverie. It was his wife, reminding him that that evening they were to attend a charity fund-raiser at the Metropolitan Museum of Art. It had been organised by one of his fellow hedge-fund managers, to give them all a chance to show their softer, more caring side. Serck groaned inwardly as his wife told him with whom she had arranged dinner after the reception, and that she had decided they would stay in their Park Avenue apartment that night, rather than drive back out to Far Hills. He wanted the time that evening to focus his mind on Metal-Exx; but however he bestrode the markets, he wasn’t about to disagree with his wife over this one.

Distracted, deep in thought, he was poor company, and his wife let him know it when they finally got back to their apartment at around two. Serck poured himself a whisky and retreated to his study to see what the east was making of the markets. He flicked the TV onto the BBC channel, and the screen was filled with the head of business correspondent Robert Peston – he of the strange hair and even stranger vocal delivery.

“Once again,” the reporter was saying, “the markets in China and its Asian neighbours have taken a beating. And with oil and metal markets also sharply lower, it’s the resource stocks that that look set to be the biggest fallers in Europe. Rio and BHP Billiton, with their heavy reliance on iron ore – whose price has also been falling as Chinese steelmakers show little enthusiasm – have suffered in recent days, as have the oil majors. But the biggest loser looks to be metals trader Metal-Exx. That company, which most people had never heard of before its flotation a few years ago, is by far the biggest trader of metals in the world and up until the turnaround in China had been riding a wave of profitability. On flotation, it created three billionaires and many millionaires among the staff who had owned it. Those fortunes are now sharply diminished, and shareholders appear to be voting with their feet. One thing that is spooking them is the level of debt that the company is widely perceived to have. If the markets for its products keep weakening – or even just stay at current depressed levels – then some fear the weight of that debt could force some sort of financial restructuring. On the line is DeWet Steyn, the boss of Congo Copper, a substantial miner of copper in Central Africa, particularly in the Democratic Republic of the Congo. Mr Steyn, how do you read what is going on in the resource markets at the moment?”

“Robert, good morning. That’s an interesting question, but not really one for us as a miner. Our business is to extract the ore from our holes in the ground; our concerns are whether or not we can do that profitably at any given time. If we can’t, then we delay our production until the price goes up. That’s the simple supply/demand logic of the mining industry. So we’re sitting on a valuable resource and we let it into the market when the price is right. Right now, we’re running our production.”

“So the inference from that is that your production cost is still below the current level.”

Serck wondered how Steyn would answer that one. “So how much further do you think prices can fall?”

“Well, that’s a difficult question. There is no doubt that with reduced demand from China, we are facing a growing surplus, not just of our product, copper, but across the board in metals and energy. So far, a lot of that surplus has been taken up by financiers happy to exploit the cheap money western governments are handing out as QE. While that persists, normal market behaviour seems to be suspended.”

“So where does that leave Metal-Exx, who seem to bearing the biggest part of the market’s gloom?”

“Again, that’s not really a question for me. Of course, we have a very close relationship with them, which has been mutually beneficial for some years. But just looking at them as an outsider, the debt burden seems to be causing some problems. But, you know, my focus is on my own company and business. I can’t worry about somebody else’s excess debt. All I would say is that the market appears to believe that they are in trouble; we ignore what markets tell us at our peril. That’s something we should have learned from history.”

“DeWet Steyn, of Congo Copper, thank you very much for talking to us this morning. And now back to the studio for the news headlines.”

Serck switched the set off. Very neatly done, DeWet, he silently complimented. You managed to sidestep the issue of your own production cost and leave the viewer with the implication that Metal-Exx have serious debt problems. For a moment, he was tempted to call the South African, but decided in the end to leave it until the following morning.

The concluding chapter follows tomorrow.

Geoffrey Sambrook 
editorial@metalbulletin.com